Credit quality to remain challenged across banks for Q2: Barclays Equity Research

MUMBAI: Barclays Equity Research has hinted that government owned commercial banks - which account of 70% of total banking business- in India may show muted growth while their loan book will continue to be under stress. In a report released today, Barclays has said, "Credit quality will remain challenged across the banks. Restructuring activity should continue to have been high given the large pipeline of loans awaiting restructuring as part of the corporate debt restructuring process."

According to Barclays, "Across the banks, guidance on asset quality trends remains critical. At SBI the market will be looking for assurance that NPA creation in the mid-corporates, SME and agri segments will decline. Similarly, for ICICI, we expect the emphasis to be on assessing the likelihood of restructuring of some of its large corporate exposures. At Axis Bank, the outlook for infrastructure exposure and size of CDR pipeline are important."

The report said that the focus will be on banks' abilities to protect NIMs in an environment of slow growth and falling rates. Credit demand has grown 16.4% on a year on year basis, lower than 19.5% a year ago. In order to push growth, banks have began offering waiver of processing fee and reduced interest rate on retail loans.

Meanwhile, justifying its view on muted growth, the Barclays report says that net interest income growth may be muted as banks have reduced loan rates on one hand while on the other hand they are unable to deploy their surplus liquidity in a slow growth environment. Non-interest income too may be muted as loan sanction activity remains subdued. For PSU banks, it expects profit after tax growth at 16% on a year on year basis in absence of treasury losses in the corresponding quarter last year.

However, Barclays is bullish on private banks as it says that it expects private banks to report healthy performance on operating profit and asset quality. However it added, "Revenue growth at Axis and Kotak Mahindra Bank is likely to be weaker than asset growth. At Axis, NIMs are likely to be lower than the strong levels seen in second quarter of last year while at Kotak Mahindra Bank, non-interest income is expected to be weak. The asset quality performance is likely to be similar to the first quarter of this year level, except at Axis Bank for which some weakening is expected."